Reflex bounce in most oversold names

Bearish moves are often punctuated by sharp snap back rallies. We are due for one as market in short term is oversold.

These sharp bounces are led by most beaten down stocks and not the stocks holding up well. You will see signs of that in last 2 days.

Big drop attract bargain hunters and also the short sellers cover. This leads to these reflex rallies. Most reflex rallies eventually fail but for mean reversion kind traders are good opportunities. But one need to have well defined setup for that.

When stock or ETF go down often the earlier reference point become anchor for many trader. They think the stock will bounce back to its high.But that is not at all necessary and also does not happen. Once a stock breaks down , it might have number of counter trend rallies but it may never come back to previous levels.

Once the reflex rally plays out some of the same stock become shorts again. If market puts in bottom then , some of the reflex rallies stick and after a period of back and forth establish new trends, that is when stocks with momentum start breaking out.

Watch stocks with momentum carefully here, if they start breaking out it will be good sign. The top 200 ranked stocks by 6 month momentum is what I am watching currently.

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